"Water shapes its course according to the nature of the ground over which it flows; the soldier works out his victory in relation to the foe whom he is facing. Therefore, just as water retains no constant shape, so in warfare there are no constant conditions."
Sun Tzu

Monday, December 31, 2012

The Five Years of my Trading Journey

This post marks the third and final piece in a series, where I reviewed my trading for 2012 and looked back at earlier years. Earlier posts discussed key statistics of my trades and correlations. This post will talk more about performance and overall lessons learnt during the journey.

The "Momentum Crash": Reason why I Trade the Way I Trade

The concept behind my trading strategy is pretty simple: I take the momentum effect as a selection tool and then trade mean-reverting swings. So momentum tells me what to trade, mean-reversion tells me when to trade. Somebody could ask why I go through that extra pain? If momentum is such a strong and persistent anomaly why not just exploit momentum alone?

Tuesday, December 25, 2012

Trading Statistics: Learning from Correlations

I recently discussed my 2012 trading results statistics on a per-trade level. Another option to analyze one's trading results is to look at monthly returns and evaluate underlying correlations. The goal is to find out, if there are market environments, which are more favorable to my trading style. 

Monday, December 24, 2012

Does Slowing Momentum in US Stocks Predict Trend Change?

Investors often over-utilize Technical Analysis in order to predict future price action. Here is my simple take on TA methods: their purpose is to figure out if an assets has been trending, if that trend accelerates, slows down or reverses. The basic premise of Technical Analysis is that trends exist. Insofar, these methods don't predict anything unless one can attach some statistics to each phenomenon or in other words: what happened in the past when similar patterns occurred.

Friday, December 21, 2012

Lessons from my 2012 Trading Stats

With 2012 almost over, it is a good time to review trading results and take a look under the hood. The following table summarizes some key stats of my last two years:

Monday, December 17, 2012

How to Trade Newtown

As a result from the horrible and sad Newtown event, gun maker Smith&Wesson is "in play" and might offer some interesting trading opportunities.

Friday, December 14, 2012

Markets Discounting a Global Recovery?

The WSJ blog had a post out there the other day about the German DAX index recording at the "highest level in nearly five years". While the headline is true, the story is actually old news. The German stock market started to act strong around June and has outperformed US stocks since then.

Monday, December 10, 2012

Sector Rotation: From Homebuilders into Financials

There might be a rotation from Homebuilders (ETF: ITB) into Financials (XLF) going on. This is still a young development, so I'll monitor the price action in these two sectors very carefully during the upcoming weeks.

BAC: Why I Bought this Breakout

Readers of this blog know that I do not trade breakouts very often. I rather like to wait for consolidation before pulling the trigger. In any case, some breakouts look too good to be ignored.

Saturday, December 8, 2012

LEN: Why are the Shorts Piling in?

Honestly, I have no answer to the title question, but it is quite interesting to see how the shorts have even increased their positions in homebuilders throughout 2012.

Keep an Eye on Homebuilders

Homebuilder stocks have been a great investment in 2012, but I don't like their recent price action. Relative strength vs. the S&P 500 has been weakening and November declines came in on significant volume. The sector almost starts to look like a short and many stocks are actually still highly shorted.

Latest Sector Rotation Visualized

There is a lot of divergence among sectors, which is not necessarily a bad thing. The following chart visualizes the sector rotation that has been going on since fall: clearly, investors have been getting out of Technology and piling into Industrials while Consumer Discretionary and Finanicals continue to outperform. Since investors usually play offense when moving into these industries, I'm not overly concerned at this point. However, I would keep monitoring relative performance. You don't want to see the money move into defensive areas.

Thursday, December 6, 2012

How to Explain Trading to Your Grandma

One thing I noticed with our yesterday's video shoot (see my earlier post) is that I have a really hard time explaining what I'm doing in 5 sentences to somebody who has no idea what trading is. If you pack "Efficient Market Hypothesis", "momentum effect" and "mean-reversion anomaly" in these sentences, you completely loose them (it's even harder when you are sitting in the spotlight and two cameras are pointing to you).

So after some reflection, here is how I would explain what I do to my grandma (it's far from perfect and I will probably keep revising this 30 sec elevator speech):

Stock prices are mostly random, but I believe that there are sometimes situations, when prices become predictable for a couple of days. This is because emotions of the crowd, greed and fear, occasionally push stock prices too far away from the real value of the company and a move in the opposite direction is likely to emerge. I can measure the emotional state of investors by analyzing certain price patterns and buy a stock, when investors become too fearful and sell when they become too excited. I'm usually holding the stock just for a couple of days and do hundreds of these trades per year.

Why I Bought WLT Yesterday

Coal stocks have been on my radar for a while. The long-term trend is negative and stocks have been underperforming for the last two years. Even though I like to swing trade momentum stocks, I sometimes take positions of beaten down companies when certain setups occur.

Walter Energy (WLT) set up a "failure test" pattern yesterday. I like this structure because many traders got trapped on the wrong side when the stock broke support and rallied back up. Shorts cover their positions and create sustained buying pressure for a couple of days:

What's even more interesting is the high short ratio of the stock: 13% of float is held short according to finviz.com. This morning, news is out that WLT could be a takeover target for various companies and shorts should really get uncomfortable.

Disclosure: Covestor Model is long WLT.

Crazy Two Weeks

The last two weeks have been crazy, but that's how it usually is during the last month of the year. Keeps me from getting into Christmas mood, but what the heck...

Blogging had to be on the back seat, but I hope I can improve post frequency.

Some good stuff is going on. The Covestor Model Portfolio has been outperforming in 2012 so far and is set to outperform the third year in a row, so I'm quite relaxed on that side. Just trying to not be too aggressive in the last weeks, even though Sorros recommends the opposite ("if you are ahead by the end of the year, start to really push it to achieve huge returns). I think at this point, it is more important to record three outperforming years in a row than having one sensational year.

Anyways, I spent last week in Israel and had the chance to meet with Covestor's Head of Content, Mick Weinstein, in Jerusalem, who invited me for the best doughnut in my life: it is Hanukah season and a tradition is to bake all kinds of fancy "Sufganiyah".

Back home, we started to prepare for a video shoot for a Covestor promotional video. Not much trading-related content in there, goal was to rather show some personal stuff, which is important. It takes a lot of trust to let somebody in Germany, who you don't know, run $50,000 of your money. This video will probably help and I'm excited to see the results in a couple of weeks.